Image source: SunEdison.
Giant renewable energy developer SunEdison Inc. (SUNEQ) hasn't filed for bankruptcy -- yet -- and that's brought about some speculative hope that it could be saved by some kind of white knight after all. Seeking Alpha recently speculated that David Einhorn could swoop in to buy the company on the cheap, given his 6.8% stake and seats on the board of directors. CNA Finance said that another developer or even a hedge fund could be an acquiring party.
Could SunEdison soon be swallowed up by someone else? Crazier things have happened, but I have my very strong doubts.
It would take billions to acquire and run SunEdison
Let's overlook SunEdison's $11.7 billion in debt and uncertain balance sheet for a moment and look at what it would take just to run the business. The first problem with acquiring SunEdison is that a company would have to find a way to build billions of dollars in projects and then find buyers for those projects.
As of early January -- the last time investors heard from management in a meaningful way -- the company had 2,884 MW of projects under construction around the world and had invested $537.4 million of equity and taken out $328.7 million in debt on those projects, or $866.1 million. And they were only about 37% completed.
Image source: SunEdison.
A simple calculation shows that you would need another $1.47 billion just to complete those projects. Given SunEdison's recent borrowing rate of LIBOR + 10%, I don't think you would want to fund construction with debt, so an acquirer would probably have to come up with a couple billion in funds to operate the company on top of any acquisition price.
And then you would have to find a buyer for these projects because no fund buying SunEdison would want to own single-digit return renewable energy projects for the next two decades. The yieldco market is shot, so maybe a utility or pension fund may want to acquire these projects, but it's uncertain if you would be able to get the $2.34 billion put into those projects back with any sort of return.
Then there's the fact that the construction and sale of projects would have to cover interest and operating costs. Management said that operating costs alone would be $600 million on an ongoing basis by the end of 2016, so this build, sell, build, sell cycle would have to keep going over and over.
I don't see much appetite for that, so buying the operating business seems like a stretch.
What about all the value in those yieldcos?
Another argument is that SunEdison's value in TerraForm Power (TERP) and TerraForm Global (NASDAQ: GLBL) have to be worth something to an acquirer. After all, SunEdison owns 60.4 million shares in TerraForm Power and 63.3 million shares in TerraForm Global, plus the incentive distribution rights (IDRs) in both companies. David Einhorn once said the IDRs in TerraForm Power alone were worth $9 per share to SunEdison.
But today, SunEdison's stake in TerraForm Power is worth just $633 million and its stake in TerraForm Global is worth $170 million. The IDRs are essentially worthless because the yieldcos have such high dividends that there's no ability to issue new capital for growth (which was the plan all along).
A $803 million value from the yieldcos may sound appealing, but when you compare it to $1.47 billion needed to complete projects and $11.7 billion in debt, it's not enough to justify someone acquiring the company.
The downward spiral continues
Speculating that a white knight could ride in to save SunEdison may sound appealing, but for that to be the case, an investor would need to see value in the pieces they're buying. I don't see that being the case, especially when you consider the billions of dollars needed to run the development business on an ongoing basis.
The biggest problem SunEdison faces is that it has lost the market's confidence, and as a result, its borrowing costs have risen dramatically. That makes it uncompetitive as both a builder and owner of renewable energy projects. And an acquirer, no matter who it is, can't fix that without investing many billions of dollars beyond the price to acquire SunEdison. And I don't see anyone with the appetite to do that.
